Question

An increase in money supply shifts the LM curve to the right, but an increase in money demand shifts the LM curve to the left. Giving reasons, explain why there is a difference. (150 words maximum)

Answer 1

The LM curve is derived from the money market in an economy.

This can be seen in the graph as below:

As one can see, LM curve is an upward sloping curve derived by the series of interaction between downward sloping money demand curve and vertically straight money supply curve.

We can infer from the left panel of the graph,

An increase in money supply will shift the money supply curve to the left, leading to fall in interest rate, which would lead to a rightward shift of the LM curve in the right panel.

Similarly, we can see, an increase in money demand will shift money demand curve to the right, leading to increase in interest rate, which would lead to a leftward shift of the LM curve in the graph to the right.

Thus, the difference occurs because of the shapes and position of money demand and supply curves.